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Investors pursuing a solid, dependable stock investment can often be led to Brown-Forman Corporation (NYSE:BF.B), a large-cap worth US$26b. Doing business globally, large caps tend to have diversified revenue streams and attractive capital returns, making them desirable investments for risk-averse portfolios. But, the health of the financials determines whether the company continues to succeed. Today we will look at Brown-Forman’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Note that this information is centred entirely on financial health and is a high-level overview, so I encourage you to look further into BF.B here.
BF.B’s Debt (And Cash Flows)
BF.B's debt level has been constant at around US$2.4b over the previous year which accounts for long term debt. At this current level of debt, the current cash and short-term investment levels stands at US$307m to keep the business going. On top of this, BF.B has produced US$800m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 33%, meaning that BF.B’s operating cash is sufficient to cover its debt.
Can BF.B pay its short-term liabilities?
Looking at BF.B’s US$703m in current liabilities, the company has been able to meet these commitments with a current assets level of US$2.7b, leading to a 3.87x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Can BF.B service its debt comfortably?
Considering Brown-Forman’s total debt outweighs its equity, the company is deemed highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can check to see whether BF.B is able to meet its debt obligations by looking at the net interest coverage ratio. Net interest should be covered by earnings before interest and tax (EBIT) by at least three times to be safe. For BF.B, the ratio of 13.84x suggests that interest is amply covered. High interest coverage is seen as a responsible and safe practice, which highlights why most investors believe large-caps such as BF.B is a safe investment.
BF.B’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around BF.B's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how BF.B has been performing in the past. You should continue to research Brown-Forman to get a more holistic view of the large-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BF.B’s future growth? Take a look at our free research report of analyst consensus for BF.B’s outlook.
- Valuation: What is BF.B worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether BF.B is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.